Third Circuit—Bar Date Controls Post-Confirmation, Pre-Effective Date Claims
Reprinted with permission from the September 10, 2021 issue of The Legal Intelligencer. © 2021 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
Except in very limited circumstances, a creditor of a bankrupt debtor must file a claim in order to secure any chance of recovery. The decision to file, however, is full of strategic considerations, including whether doing so will submit the creditor to bankruptcy court jurisdiction thereby limiting where litigation of the claim will occur. A recent case of first impression from the U.S. Court of Appeals for the Third Circuit provides guidance on this important decision for those claims that arise during the period between plan confirmation and the plan's effective date. See Ellis v. Westinghouse Electric, 2021 U.S. App. LEXIS 26092 (3d Cir. Aug. 30, 2021).
In Westinghouse, the debtor's plan of reorganization set a bar date that provided that holders of post-confirmation administrative expense claims, who did not timely file requests for payment were forever barred from asserting such claims against the debtor and that such claims were discharged as of the plan's effective date. The plan was confirmed by the bankruptcy court on March 28, 2018, but did not go effective until Aug. 1, 2018. On the effective date, the debtor provided notice to creditors, informing them that the administrative claim bar date was Aug. 31, 2018, and that any such claims not timely filed would be discharged.
Between the time the plan was confirmed and became effective, the debtor terminated the employment of Timothy Ellis due to departmental restructuring. Ellis, who was 67 years old, believed the termination constituted unlawful age discrimination. There was no dispute that the date of termination was the date his employment discrimination claim arose. In October 2018, Ellis, without having filed an administrative claim, commenced suit against the reorganized debtor in the U.S. District Court for the Western District of Pennsylvania. The reorganized debtor filed a motion for summary judgment on the basis that Ellis' claim was not timely filed in the bankruptcy prior to the administrative claim bar date and, thus, discharged by the plan. The district court denied the reorganized debtor's motion and granted summary judgment in Ellis' favor, holding that his claim was not discharged by the plan because Section 503 of the Bankruptcy Code does not permit a post-confirmation administrative expense claim to be discharged by a bar date; and Section 1141(d) of the Bankruptcy Code proscribes discharge of post-confirmation claims.
Because of the novel and complex issues in this case, the district court certified two questions to the Third Circuit: is a plaintiff's post-confirmation, pre-effective date employment discrimination claim barred by 11 U.S.C. Section 503 if the plaintiff did not file an administrative claim prior to the administrative claim bar date; and is such claim discharged by 11 U.S.C. Section 1141, and under the principles of res judicata, if the claim was not filed in the bankruptcy court prior to the post-confirmation effective and discharge dates?
In reviewing the certified questions, the Third Circuit determined that it had to weigh the Bankruptcy Code's principal purpose of granting fresh starts to debtors against creditors' competing interests of pursuing their claims. First, the Third Circuit determined that Ellis' employment discrimination claim was an "administrative expense claim" as defined by the plan and Bankruptcy Code Section 503(b). While an employment discrimination claim on its face may not appear to be an "actual, necessary cost and expense of preserving the estate" as required by section 503(b)(1)(A), the Third Circuit held that Ellis' claim was an administrative expense because it was a "cost ordinarily incident to operation of a business." Specifically, the Third Circuit determined that Ellis' employment benefitted the debtor's estate and, thus, treating an employment discrimination claim as an administrative expense furthered the policy goal of Section 503(b) by incentivizing employees to continue working for debtor by assuring them that their rights will be protected.
Second, the Third Circuit found that bankruptcy courts are entitled to set and enforce administrative claim bar dates. The Third Circuit noted that debtors need the finality of understanding the universe of claims against them and that bar dates further the goal of providing debtors with fresh starts by disallowing late-filed claims. With respect to administrative expenses, bankruptcy courts' ability to establish and enforce bar dates stems from Bankruptcy Code Section 503(a), which the Third Circuit determined is both a "carrot and a stick for creditors" by incentivizing timely claims so administrative creditors can receive priority treatment while disincentivizing late claims that may be discharged.
Third, the Third Circuit held that Section 503 authorizes the discharge of administrative claims that arise between plan confirmation and effectiveness. The Third Circuit found that nothing in Section 503 limits the bankruptcy court's authority to set administrative claim bar dates for only those claims incurred pre-confirmation. Section 503's only temporal limit is that administrative claims are expenses to preserve the "estate." While a bankruptcy estate often dissolves upon confirmation, the plan itself can alter this default. Here, the debtor's plan provided that estate property did not vest in the reorganized debtor until the effective date. Thus, at the time that Ellis' claim arose between confirmation and effectiveness, the estate still existed. The district court's opinion questioned whether the discharge of an administrative expense could be based on Section 503, however, the Third Circuit found that bar dates and discharge were integrally related and work together.
Fourth, the Third Circuit held that post-confirmation claims could be discharged by Bankruptcy Code Section 1141(d). Although Section 1141(d) creates a default rule that the discharge applies only to pre-confirmation debts, the section's introductory clause makes clear that a plan or confirmation order can override that default. Here, the debtor's plan provided that post-confirmation claims not timely filed in the bankruptcy court by the administrative claim bar date were discharged. Therefore, the Third Circuit held that Ellis' employment discrimination claim was discharged because he had not timely filed an administrative expense request in the bankruptcy case.
The Third Circuit also addressed certain policy arguments asserted by Ellis that the court's decision would hamper creditors' rights. The Third Circuit found that Ellis and similar creditors had other creditor protections to rely on. In particular, claims can only be discharged if the creditor has received due process, including receipt of adequate notice of the bankruptcy and an opportunity to present their claim. Additionally, the Bankruptcy Code allows bankruptcy courts to allow late claims "for cause."
The Westinghouse decision provides guidance and a warning to creditors whose claims arise after plan confirmation but prior to the effective date. A creditor cannot simply assume that because confirmation has occurred the bankruptcy court no longer controls the filing of a claim. Therefore, it is imperative to confirm the status of the bankruptcy case and the plan before deciding to proceed directly with litigation outside the bankruptcy court. No doubt Ellis was shocked to learn that his claim was effectively eliminated simply because a claim was not filed in the bankruptcy court. The critical part of the Westinghouse decision is that claims that do not appear at first glance to be "administrative expense claims" against an estate may actually qualify and, if they do, it is imperative that such creditor file an administrative expense request prior to any administrative claim bar date. If not, Westinghouse would disallow and discharge such claim, leaving the creditor with no recovery against the debtor, its estate or the reorganized debtor.